Youth Unemployment Shows The Effects Of a Minimum Wage That Is Too High

In the current debate over whether to raise the minimum wage or not, and if by how much, too little thought is being given I think to the justifications for the particular numbers being proffered. Specifically, I worry that too many are accepting that a rise in the minimum wage has no, or little, effect on unemployment rates. And that's not at all what the research is actually telling us. If you look in more detail at the research papers they all qualify their statement to something like "modest rises" seem to have little effect on employment rates. All of which just begs the question of what is "modest"?

One way of trying to answer that question is to approach this from the other end. Whatever the effects of a minimum wage upon unemployment we would expect to see them first among those workers where the minimum wage is really binding. That is, among the young and untrained whose wages are going to be most affected by whatever the minimum is. And here we've got rather a lot of interesting evidence. From a friend of mine in the UK, we get this for that country:

Here is the Low Employment Commission report for 2008 (before the recession):

3.18 The decline in the labour market position of young people has been general across the UK. The proportion of young people not in FTE aged 16–21 who were in employment fell in almost all regions between 1998 and 2007, unlike those aged 22 and over who saw their employment share increase in all areas of the UK except London. However, by European standards, young people’s labour market position in the UK is relatively strong.

Good one! Our labour market may be doing badly, but just look at Spain! Those guys are really screwed. They continue:

Given that employment in the UK has been at record levels, it is difficult to explain why young people have not done better in the labour market. Two significant developments in the labour market in recent years have been the increase in the number of people of pension age becoming economically active and the arrival of predominantly young migrant workers from the European Union accession countries.

It’s “difficult to explain”… right. A total mystery.

It's worth clicking through that link to look at his chart. For the youth unemployment rate starts to rise precipitately just as one particular thing happens. That particular thing being:

A £3 minimum wage for 16 and 17-year-olds is to be introduced from October 2004, the government said.

But the unemployment rate for 16 and 17 year olds, which had always tracked a fairly predictable but noisy path above the adult unemployment rate, instead took a jump.

Where we might have expected a youth unemployment rate around 14%, it instead touched 20%.

Two quarters later, when adult unemployment rates hit 4.5%, and we would have expected youth unemployment rates around 16%, the youth unemployment rate instead hit 27%.

Statistics New Zealand tracks unemployment by age going back to 1986. Before June 2009, youth unemployment rates had never exceeded 25%. They came closest in December 1992 when they hit 24.9%; the adult unemployment rate exceeded 9% from June 1991 until March 1993 and briefly topped 10%.

So it’s not surprising that youth unemployment outcomes were then so poor. But from June 2009 until June 2011, the last quarter for which I have the more finely-detailed age breakdowns,* the youth unemployment rate did not fall below 25% in any quarter while the adult unemployment rate did not exceed 5.4%.

Nine consecutive quarters’ youth unemployment outcomes higher than the highest previously recorded, at a time when adult unemployment rates were low relative to other downturns, seems something in need of explanation.

That explanation being that New Zealand used to have a special, lower, minimum wage for teens and youths and the government abolished this. So they were now, the most inexperienced and lowest value labour, exposed to the full effects of the full adult minimum wage. And, amazingly, teen and youth unemployment rates rocketed. The chart looks much like the one from the UK as well.

So, we've a move from no youth minimum wage to the having of one at the very least coinciding with a significant rise in youth unemployment. And we've the abolition of a special youth minimum wage leading to another rise in youth unemployment. Meaning that we do seem to be finding employment effects of a minimum wage exactly where we would expect to find them. Among the least trained and thus lowest value labour in the country.

We could, as some people do, insist that this is all to the good. That youths should be in school or in training rather than the labour force. And thus if a high minimum wage forces them out of work and back into school this is a good thing. And I wouldn't particularly argue against that notion. But I would point out that it this is explicitly, not just implicitly, accepting the point that a minimum wage can and will have significant unemployment effects.

Which brings me back to my original point. Modest increases in minimum wages might well have only modest effects on employment levels. But that does rather depend upon what one uses as the definition of "modest". And it's clear and obvious that what might be modest for the population as a whole won't be so for some subsections of it. The coming likely rise in the US minimum wage is going to exacerbate the problems of teen and youth unemployment in that country. Maybe you can still argue that overall it will be worth it but I do rather have my doubts.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am....